Gold/US Dollar – “And they’re off….

Posted by David Rosenberg - Gluskin Sheff

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The economy is weakening and equities are rallying (though again, as we saw on Friday, with volume declining across the board).  The U.S. dollar is faltering to six-month lows against the euro despite the fact that Spain was just got downgraded and Ireland’s bank bailout just took its deficit-to-GDP ratio to Zimbabwe-like levels of 32%.

Gold continues to make new highs with the dollar’s weakness; ditto for commodities in general.  The Canadian dollar has firmed to the upside even though most of the incoming Canadian data have been coming in worse of late than what we have seen stateside.

It’s all about the dollar.  When it goes down, the liquidity spigots gets turned on.  When it rallies, it’s a sign of a flight-to-safety.  Let’s just say that we could well be in for a big short squeeze here on the U.S. dollar.  According to the latest Commitment of Traders, the net speculative long position on euros is at 27,451 contracts (125,000 euros), which is a huge swing from the mid-May net short position of 105,145 contracts and the most that the non-commercial accounts have been long the euro since the week of November 10th, 2009.  What happened back then?  Well, the euro went from 1.50 to 1.47 a month later, 1.45 two months later and 1.37 three months later.

While we are still huge long-term fans of gold, it looks hugely overbought here and even a 10% correction would not violate any secular trend-line.  The net speculative position on gold is 280,300 net long contracts (100 troy ounce) which ranks in the top three crowded trades ever for the yellow metal (silver, however, is not even close at 52,830 net longs — the record is 72,657).   When you assess the correlations, any short-covering rally in the U.S. dollar would be:

• Positive for Treasuries (lower yield) 
• Negative for equities 
• Positive for the VIX 
• Negative for gold 
• Negative for commodities     
• Negative for risk (credit, small caps, emerging markets)

Also In Today’s Breakfast with Dave

• While you where sleeping: the on-off risk trade is off again

• What’s on my mind? We highlight five developments that are driving investor sentiment at the current time

• Bond bubble? Give me a break!

• Precious metals … precious indeed — and we are talking about gold and silver here

• ISM manufacturing index — another poor report

• Lacking confidence: the reality is that the confidence data are already telling us that the mood of the household sector is depressed

• U.S. consumer spending — less than meets the eye

• U.S. private sector construction also sliding fast

….read full article HERE

….read summary HERE